Pricing

Price = Cost + Profit

Price brings in the revenues

This is the only element in the marketing mix that brings in the revenues. All the rest are costs Price communicates the value positioning of the product.

Pricing policy
Selecting the pricing objective Determining demand Estimating costs Analysing competitors costs, prices, offers Selecting a pricing method Selecting the final price

The pricing objective

Survival Maximum current profit Maximum market share penetration pricing Maximum market skimming Product quality leadership

Determining Demand
Price sensitivity Price elasticity of demand

What influences price sensitivity?

Price quality Unique value effect Substitute awareness Difficult comparison End benefit Total expenditure

What is price elasticity?

This determines the changes in demand with unit change in price If there is little or no change in demand, it is said to be price inelastic. If there is significant change in demand, then it is said to be price elastic.

Demand is likely to be less elastic when

There are few or no substitutes Buyers readily do not notice the higher price Buyers are slow to change their buying habits Buyers think that the higher prices are justified

Price Quality Strategies

quality

Super value

High value

Premium

Good value

Medium value

Overcharging

Economy

False economy
Price

Rip off

Estimating costs
Fixed costs Variable costs Learning curve

Pricing methods
Markup pricing Target return pricing Perceived value pricing Value pricing Going rate pricing Sealed bid pricing

Markup pricing
Adding a standard markup to the products cost Suppose a manufacturer has following cost and sales expectations
Variable cost/unit = Rs 10 Fixed Cost = Rs 300,000 Expected sales = 50,000 Unit cost = Variable cost + Fixed Cost/Unit Sales Rs 10+ Rs 300,000/50,00 Rs 16

Now assuming that manufacturer wants to earn 20% markup on sales.

Markup price =

Unit Cost (1 desired return on sales

Rs 16
(1 0.20) = Rs 20

Target-return pricing
The firm determines the price that would yield its target of return on investment Desired return x invested capital Unit sales

Target-return price = Unit cost +

Suppose the manufacturer has invested Rs 10 lacs and wants to set a price to earn 20% ROI, the target return price would be calculated as per above mentioned formula.
The manufacturer will realize this 20% ROI provided its cost and estimated sales turn out to be accurate Break-even chart to learn what would happen at other sales level

Break-even Chart
1200
1000

Total Revenue Target Profit Total Cost Break-even point

Rupees (000s)

800

600
400

Fixed Cost
200 10 20 30 40 50

Sales Volume in units (000s)

 The total revenue and total cost curves cross at 30,000 units. This is the break-even volume and can be verified by Break-even volume = Fixed cost (price variable cost)
Rs 30,000
Rs 20 Rs 10 = 30,000

If the manufacturer sells 50,000 units at Rs 20, he earns Rs 200,000 on his Rs 10 lacs investment

Perceived-value pricing
Pricing on the basis of customers perceived value Perceived value is made of several elements Buyer's image of product, performance, the channel deliverables, the warranty quality, customer support, and softer attributes like trustworthiness, esteem, etc Each customer places different weights on these different elements Price Buyers stripped down version & reduced service Value Buyers keep innovating new value Loyal Buyers invest in relationship building & customer intimacy

Value pricing
Companies like IKEA, Walmart and Big Bazaar have adopted pricing strategy in which they win loyal customers by charging a fairly low price for a high quality offering

Everyday Low Pricing (EDLP)

Takes place at retail level Retailer charges higher a constant low price with little or no price promotions and special sales. These constant prices eliminate week-to-week price uncertainty and can be contrasted to the high-low pricing of promotion-oriented competitors. High-low pricing charging higher prices on an everyday basis coupled with frequent promotions in which prices are temporarily lowered below the EDLP level EDLP can lead to lower perceived price by consumers over time than frequent, shallow discounts (high-low), even if the actual averages are thesame

Going-rate pricing
The firm bases its price largely on competitors prices The smaller firms follow the leader changing their prices when market leader's price change rather than when their own demand or costs change Seen to reflect the industrys collective wisdom

Auction-type pricing
Agricultural produce, minerals, metals, art and antique objects English Auctions (Ascending bids) One seller and many buyers Yahoo! And eBay bidder raises the offer price until the top price is reached Being used today to sell antiques, cattle, real estate and used equipment and vehicles

Auction-type pricing
Dutch Auctions (Descending bids) One seller and many buyers an auctioneer announces a high price and then slowly decreases the price until a bidder accepts the price One buyer and many sellers The buyer announces something that he wants to buy and then potential sellers compete to get the sale by offering the lowest price

Auction-type pricing
Sealed-bid auctions Would-be supplier can submit only one bid and cannot know the other bids Governments, large organzations & institutions used this method to procure supplies etc A variant of sealed-bid auction involves a two-stage bidding process
Technical Bid & Commercial Bid Only those who qulaify on technicalbids are asked to submit the commercial bids

Psychological pricing
It is used to lessen the impact of the actual pricing in the consumers mind It is used as a surrogate to indicate the product quality or esteem

Geographical Pricing
Different pricing at different locations Could be in terms of barter, countertrade and foreign currency

Discounts and Allowances

Early payment Off season Bulk purchase Retail discount Cash discount Trade in allowance

Promotional Pricing
Loss leader pricing Special event pricing Cash rebate Low interest financing Longer payment terms Warranties and service contracts

Discriminatory Pricing
Customer segment Product form Image pricing Location pricing Time pricing

Preconditions
Market must be segmentable The lower price segment should not be able to resell the product to the higher price segment The competitors must not be able to undersell the firm in the higher price segment Should not breed customer resentment and illwill Price discrimination should not be illegal

Initiating Price cuts

Excess plant capacity Competition Aggressive pricing

Initiating price increases

When demand exceeds supply When costs go up Govt. policies Reduce/remove discounts and rebates

Indirect price increases

Shrinking pack size for same price Substituting less expensive raw materials Reducing product features Removing product services Using less expensive packaging material Reducing the no.of packs and sizes offered Creating new economy brands

Reaction to price changes

Customer reaction Competitor reaction

Responding to competitor price changes

Maintain price Maintain price and add value Reduce price Increase price and quality Launch a low price fighter